US government debt prices rallied on Wednesday after soft readings on employment and the services sector reinforced the view that the economy was losing steam and the Federal Reserve would not raise interest rates.
The yield on the two-year note fell to a six-month low after an ADP report showed US companies added fewer employees than expected in September and after an index of the service sector fell to a three-year low.
The Institute for Supply Management's non-manufacturing index resonated with the market after the weaker-than-expected ISM report on manufacturing on Monday, said Banc of America Treasury and agency strategist George Goncalves in New York.
"Both of them showed a decline in activity; both showed a decline in prices paid, demonstrating a little easing on the inflation side," he said. "It was bond supportive."
Treasury prices also got help from Fed Chairman Ben Bernanke's comments that the US housing market was undergoing a substantial correction which would reduce economic growth. Bernanke's "comments on the housing market once again got people nervous that they were missing a potential rally in Treasury prices," said Thomas di Galoma, head of US Treasuries with Jefferies & Co in New York. "Treasuries were off to the races as a result."
Two-year yields, which are most sensitive to the outlook on Fed rate moves, fell to 4.59 percent as its price rose 4/32. Bond prices and yields move inversely.
The benchmark 10-year Treasury note rose 14/32 to yield 4.56 percent versus 4.62 percent late on Tuesday.
The prices paid index for both ISM surveys fell sharply in September, reflecting the recent drop in energy prices, with prices in the services survey sinking to the lowest since August 2003. The weaker inflation figures will likely keep the Fed from raising interest rates at its October 24 policy meeting, analysts said. The ADP report on private employment appeared to lay the groundwork for softer bond yields going into the Labour Department's monthly employment report due on Friday.
Economists polled by Reuters on Friday, before the ADP release, offered a median forecast of 125,000 new jobs added to US non-farm payrolls in September, down slightly from 128,000 in August. But other readings on employment for the month of September indicate a sharper slowdown in hiring, which could help push bond prices higher.
Shortly after the ADP report, Deutsche Bank halved its forecast for Friday's employment report to 50,000 and Action Economics also cut its forecast, by 10,000 to 115,000. "ADP remains an unproven proxy, but in line with ISM manufacturing, Challenger, and Hudson, we have four different sources pointing to a lower-than-consensus NFP showing on Friday," said David Ader, treasury market strategist at RBS Greenwich Capital.